PLACE OF STOCK INVESTMENT IN FINANCIAL PLANNING
STOCK MARKETS AS LAST PRIORITY
I lived my life mostly without planning , without worrying for future and even without a dream . I lived for the present and I am happy about it . I had no regrets of the yesterday nor much concerned about the tomorrow . I took what ever life gave me as also what my employer gave. So I did not need a great plan for my life . Whatever I planned was to cater my immediate needs or for a near period . I had no great ambition to become rich or famous .
However , being in financial field , I was deeply interested in money matters , the way people create wealth or destroy them . During the course of my employment ,I lived in various places , had occasions to meet various people with different cultural , financial ,regional background . As part of my job , I would know about their financial history , present and future plans . As a banker , I would have occasions to meet the people who were ambitious , want to achieve and want to take up tasks beyond their current capabilities . People who want to grow and have dreams about their future . They begin their journey propelled by their dreams . Their dreams take them to their progress path and success and would live much better than those who have no goals or ambitions . Their success lies in their enthusiasm to do new things , better things and their ability and willingness take Risks in their life . I noticed that some entrepreneurs who were very good in their entrepreneurial skills failed miserably due to lack of financial plans , some times due to callousness and some times due to ignorance . This holds good even for ordinary men and women of middle class or what is called salaried class . Whenever one takes up a task which involves a cash outflow beyond one’s current income , it is better to have a plan detailing the funds to required to accomplish , source of such funds as well as repay plans . Further knowing and assessing the risks involved in such endeavors and taking steps to mitigate those risks would save them from potential disasters. Say ,for instance , in case of buying a house or a establishing a factory . Achieving prosperity requires long term income streams and a careful financial plan .
Many times , it is construed that stock markets are gateways for richness in fast mode . Many middle class men and women entered the markets in 80s and 90s , dreaming to become rich overnight . They put whatever their little savings they had and some even borrowed to invest . Their dreams went soar , due to volatility , scams , or just their inability to make ” Profits ” . Many returned empty handed or after burning their fingers .
I consider investing or trading in shares as a last priority one should have in pursuance of one’s ambition to become rich unless you are a professional trader or broker . I am not saying that such investment should be totally avoided . In fact , investing in shares should also become a part of financial planning to achieve prosperity , but after catering to all other allocations . Then what are the priority areas of financial planning for a mission to attain prosperity ?
Basically any financial statement has two sides of Income and expenditure . The difference viz income minus expenditure is one’s savings in individual’s case and profit in case of an enterprise . To earn an income , One needs human capital of intelligence , work , education or money . A laborer may invest his hard work or a CEO his education and experience . One individual’s savings or profit of an enterprise may turn as capital of an enterprise and become a part of another financial statement called ‘asset and liabilities ‘ All the financial planning one needs to do is to do is to assess current positions of these statements and make strategies to take the each component in the desired direction . Hence financial planning will consist of income planning and expenditure planning and lastly planning your savings . We also have to take in to account the risks we may encounter in keeping up our planned income and expenditures . To mitigate those risks , we will require insurance . Once we have savings in our hand , planning its investment becomes necessary . If we had borrowed funds to create our income , we also require planning for repaying those borrowings . Once we have completed planning our income, expenditure , insurance and savings and borrowings if any , our attention has to turn to over all position called balance sheet , containing assets and liabilities .
Before taking up the last priority of investing in shares as first topic for discussion , I briefly touch here about the priority areas one should look before investing in shares . I would like to have separate elaborate sections in dealing with priority areas .
One should have an eye on one’s present income levels , especially with regard to its steadiness . The persons in business whose income levels vary seasonally have to look for alternative business supplementing the existing one . Similarly salaried persons to the risk of possible loss of jobs . One needs to have built in cushion mechanism to make their income stream steady and growing to take care of inflation at least . First priority of any stock market investor should be his prime business or job . His mental faculties should work towards streamlining & improving the prime income . One should never neglect the prime job for the sake of stock markets .
Normally we increase our expenditure in line with increase of our income . We spend according to our status , meaning the level of income . Our ability to curtail the tendency to enhance expenditure will greatly enhance our savings ability . For example , eating at a good restaurant need not be necessarily at a five star hotel . I am not recommending foregoing one ‘s day to day pleasures for the sake of future dream . However one can always find ways to curtail expenditure without sacrificing luxuries of life . More one has ability to avoid escalation of expenditure , more one will enhance his ability to save .
There will be risks of reduction of income stream as well as sudden spurt in expenditure in one’s life . A loss of job or a future retirement or a medical bill to pay , for examples . So to mitigate those risks , one needs to have either appropriate insurance policy or savings in the form of liquid assets like bank deposits . One has to assess all possible risks he may encounter either in income or expenditure and take appropriate measures to mitigate the same .A credit card will be a good insurance against sudden expenditure . Credit card dues may be settled later after realizing other not so liquid assets . Insurance planning is vital .
What remains after expenditure and insurance out of income is one’s savings . The first priority in allocating savings should be towards additional commitments towards insurance . For example , Bank balance to cover at least next six months of expenditure will act as insurance in case of sudden loss of job or an unexpected medical bill . Savings in this form must have hallmark of liquidity so that the money can be removed on short notice . May be a bank deposit which can be foreclosed without much fuss . This fund should be in addition to the insurance policies taken to cover various risks , as settlement of insurance claims take their own time and may not be available at zero time .
Now after allocating additional amount towards insurance , we are left with funds ready to be invested . These funds for investment are not required for the present and are kept aside to meet our future plans if any . May be a margin towards housing loan or a seed capital for new enterprise we want to start . Investment funds which are earmarked for a specific goals have to be available at the time of their need . They are not just required for the present . Hence such funds should be invested in such instruments which have capital guarantee in the least and risks to the minimum . May be a debt fund or a bank deposit or a fixed tenure mutual fund .
INVESTMENT IN STOCKS
After allocating our income for expenditure , insurance & targeted investments , we may be left with a portion of our surplus income which can be put invested for longer periods with risks of losing principal or interest with an eye to maximize rewards for taking such a risk . These funds are not needed for the present and do not become part of our any other future plan . Losing them will not have any adverse effect on either our present lifestyle or future plans . They are pure surplus which can be invested in risk instruments . If one plays with this fund carefully and systematically , one can generate additional income and prosperity . But investing in such instruments should be NEVER at the cost of our financial health and we may lose sleep as well as our life if we overindulged . I would not invest more than 50 % of such surpluses in shares . Balance may be in other forms of investment like gold , real estate , pension fund etc . Investing in shares would be my last category of investment after allocating for expenditure , insurance , targeted funds , and also for instruments with lesser risks like bank deposits , pension funds , company deposits . Once one has taken care that the amount so invested in stock market is free from all financial needs , one can venture to play in the stock market with HOPE, CONFIDENCE & STAMINA . One can play in the market for a long long time and be a winner .
My various articles in this blog covers various aspects of trading and investment in stock markets and are my personal opinions . You may start from my first article published in Feb 2014 titled CABBAGE PRICE AND SUICIDES and read chronologically thereafter . I will be happy to receive your feed back and comments on the issues raised there in .
No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.